ALTERNATIVES FUNDS OF HEDGE FUNDS
SUMMARY
UK funds of hedge funds
have a bias towards UK,
US and European hedge fund
markets to the detriment of the
opportunities that Asian hedge
funds offer.
Negative attachments
to the Far East being
a developing market mean
its inefficiencies make it an
attractive proposition for hedge
(particularly arbitrage) funds.
Compared with their
developed counterparts
Asian hedge funds are likely to
remain more volatile although
their growing expertise is
helping to close this gap.
“
A generally more
accommodating,
market-friendly
attitude among the
region’s regulatory
bodies has also
played no small
part in boosting
the industry’s recent
development
”
investment, not to mention
domestic wealth creation,
necessitating stronger
financial infrastructure,
operating in a more robust
regulatory environment.
Also characterising the
current industry is the
rising numbers of dedicated,
locally-based experts.
Not so long ago, most
Asian hedge funds were
still being run from Europe
and the US. But with more
managers setting up locally,
as well as global hedge
funds establishing dedicated,
regional market centres,
the skill-set across the
industry has become wider
and more in-depth.
l Optimism abounds
In the past five years, the
number of funds in the
Asian hedge space has risen
to more than 1200, with
assets under management
growing sharply to $171bn
(see graph opposite).
A key fillip for the
industry was a recognised
‘can-do’ culture, steeped
in optimism. With critical
mass hard to establish and
track records insufficient in
many cases, Asian hedge
fund managers instead
made operational transparency
and open access to
information key tenets of
their businesses, understanding
the need for this
flexibility to attract US and
European business. This is
a positive trend that continues
today.
Perhaps one of the clearest
signs that today’s Asian
hedge fund sector has
come of age, is the diversification
of strategies now
being employed by managers.
For a long time, financial
market limitations and
a dearth of specialist skills
meant Asian hedge funds
offered predominantly
equity long/short strategies.
As recently as five years
ago, these still accounted
for a significant majority
of the Asian hedge fund
market, presenting little in
the way of diversification
for potential investors.
Growth in the Asian hedge fund industry
1,200
900
600
300
0
’96 ’98 ’00 ’02 ’04
*To Jul ’08.Source: Eurekahedge, Axa IM
No. of funds
l Managers benefit
AUM
The rapid development of
Asian markets necessitated
a far more robust and
sophisticated infrastructure.
This has enabled managers
to run more varied and
complex strategies, with
fixed income, quantitative,
commodity trading advisers
and multi-strategies increasingly
prominent across the
hedge fund space.
A generally more accommodating,
market-friendly
attitude among the region’s
regulatory bodies has also
48 PORTFOLIO ADVISER [www.portfolio-adviser.com] DECEMBER 2008
...depends on who swings the club
To find out more, call Bridget O’Callaghan on +44 (0) 20 7393 8733
or email info@gam.com. Alternatively, visit www.gam.com
played no small part in
boosting the industry’s
recent development. A
decade ago, these self-same
regulatory bodies seized
upon the opportunity to
blame hedge fund activity
for, if not causing then
certainly exacerbating, the
Asian financial crisis.
But while impediments
remain in some countries,
today’s more mature and
balanced view of hedge
funds seems to indicate that
regulatory bodies under-
’06
stand and accept their role
in the market. Certainly, a
key breakthrough in this
regard has been the easing
of restrictions on short-selling
in many Asian markets,
allowing far greater investment
flexibility.
Similarly encouraging
for potential Asian investors
is the generally healthy
pipeline of good quality
start-ups that continue to
come through, encouraged
by the growth and
opportunities the region
offers. Importantly, there
are still some restrictions
0
’08*
200
150
100
50
$bn
on openly selling hedge
funds in China and India.
While it may take time, as
these vast markets open up
over coming years, there
will be huge opportunities
for hedge fund managers
and allocators alike.
l Minimal damage
As with US, European and
global hedge fund managers,
the financial market
turmoil has taken a toll on
Asian hedge fund performance.
Having notched up
five years of double-digit
gains, sector losses over
the past year are an almost
new phenomenon for
many market participants.
But strong fundamentals
continue to underpin Asian
financial markets. With far
less exposure to bad debt
problems, they are likely
to be among the first to
rebound strongly, once the
current stresses ease.
So strong economic
growth, coupled with ongoing
inefficiencies in capital
and information markets
should continue to provide
attractive opportunities
for Asian hedge funds.
Investors can reasonably
expect both returns and
volatility to be higher,
strategy by strategy, than in
more developed markets.
While UK FOHFs are
upping their Asian exposure
slowly, their overriding
focus on US and
European hedge funds
continues to exclude them
from an increasingly meaningful
slice of the global
opportunity set.
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